IN MY OPINION ... Federal Preemption Limits Arizona Ruling on State Arbitration Law
Meyerson, Bruce, Dispute Resolution Journal
Author Bruce Meyerson argues that, for most employment disputes, the recent Arizona Supreme Court ruling that employment disputes are not covered by the state arbitration law will not apply due to preemption by the FAA.
For almost 80 years, the Arizona Arbitration Act has contained an exclusion for employment agreements "between employers and employees or their respective representatives."1 Last year, Arizona's highest court was called upon to determine whether that exclusion applied to all arbitration agreements between employers and employees, or just to arbitration agreements found in collective bargaining contracts. The court's holding in North Valley Emergency Specialists, L.L.C. v. Santana2 is straightforward. The court held that the exclusion exempts from the arbitration act "all arbitration agreements between employers and employees."
Much has been made of this decision. Indeed, the headline about this case ("Employment Arbitration Dealt a Blow in Arizona") in the previous issue of this Journal suggested that employment arbitration agreements may no longer be enforceable in Arizona. However, that is not likely to be the result of the court's decision. The reason is that the court was not called upon to consider the relationship between the Arizona Arbitration Act and the Federal Arbitration Act (FAA), which applies to any "contract evidencing a transaction involving commerce." I believe that U.S. Supreme Court decisions have made the FAA applicable to virtually every employment relationship. Thus, the ruling in North Valley Emergency Specialists should have an extremely limited impact because the Arizona exclusion for employment agreements will be preempted to the extent the agreement at issue is covered by the FAA.
The Federal Arbitration Act
The FAA is not only a procedural statute that may be invoked in federal and state court, it is also a substantive statute prohibiting state laws that single out arbitration agreements as unenforceable. The Supreme Court stated in Southland Corp. v. Keating,3 that in "enacting § 2 of the [FAA], Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration." In subsequent decisions, the Supreme Court ruled that the FAA preempts state laws that interfere with or limit the ability of parties to enter into arbitration agreements. Although parties may challenge arbitration agreements on the same grounds applicable to all contracts, states may not impose barriers to arbitration that are unique to those agreements.
In Doctor's Associates v. Casarotto, the Supreme Court addressed the enforceability of a Montana statute. The statute provided that for an arbitration agreement to be valid, the contract in which it was contained must have a "notice" of arbitration typed on the first page of the contract in underlined capital letters. Because this requirement was not applicable to contracts generally, the High Court held that the Montana statute was preempted by the FAA. The Court stated unequivocally: "Courts may not ... invalidate arbitration agreements under state laws applicable only to arbitration provisions. [W]e have several times said, Congress precluded States from singling out arbitration provisions for suspect status."4
As interpreted by the Arizona Supreme Court, the exclusion for employment agreements in the Arizona Arbitration Act applies to all employment contracts, not just collective bargaining agreements (which are not covered by the FAA). Accordingly, in my view, the exclusion in A.R.S. § 12-1517 constitutes a state law restricting arbitration on a ground not applicable to contracts generally. Thus, for agreements evidencing a transaction "involving commerce," the FAA would govern and the Arizona Arbitration Act would be preempted. The important question that must be answered next is what effect would the FAA have?
The Scope of the FAA
First, there is the issue of the exclusion in § 1 of the FAA for "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." Most federal courts of appeal had found this exclusion to be limited to transportation workers. The 9th Circuit was the only holdout, ruling that § 1 excludes all employment agreements. But in 2001, in Circuit City Stores v. Adams,5 the U.S. Supreme Court rejected the 9th Circuit's interpretation. The Court held that the narrow interpretation of § 1 was correct. This interpretation only excluded workers engaged in interstate transportation. Thus, if an employment arbitration agreement not involving a transportation worker evidences a transaction "involving commerce," that agreement would be covered by the FAA. So, what is a transaction involving commerce? It is to that question we now turn.
The Supreme Court considered this question in two cases. In the first case, Allied-Bruce Terminix Companies v. Dobson,6 the Court held that the term "commerce" should be viewed broadly, extending the FAA to the limits of Congress's Commerce Clause power. In rejecting the view that the FAA's coverage should be limited to cases where interstate commerce is contemplated by the parties, the Court relied on the breadth of the phrase "involving commerce," which it found was broader than the commonly-used phrase "in commerce." "Involving commerce," the Court said, "signals an intent to exercise Congress's commerce power to the full." The Court also determined that if a transaction turns out to involve interstate commerce, even if the parties did not "contemplate" such involvement, the FAA will apply.
In the second case, Citizens Bank v. Alafabco, Inc.,7 decided in 2003, the Supreme Court addressed the obvious next question: Must the contract actually involve commerce or could it be the type of contract that, in general, involves commerce? In Citizens Bank, the contract at issue was a debt restructuring agreement between an Alabama lending institution and an Alabama corporation. The High Court decided that this agreement was a contract evidencing a transaction "involving commerce" within the meaning of the FAA, even though the two parties were Alabama businesses. Supporting the Court's decision was the fact that the debtor did business outside of Alabama, and its security for the debt included inventory outside the state.
Importantly, the Court said that the proper focus of the inquiry is not on the individual transaction but on "consideration of the 'general practice' those transactions represent." It further noted that the broad impact of commercial lending on the national economy is subject to Congress's regulatory power under the Commerce Clause.
Thus, to determine whether the FAA applies, it is not necessary for the agreement to actually involve commerce. One must look beyond the individual agreement and ask whether agreements of this type would fall within the purview of the Commerce Clause. One federal district court put it this way: "[I]f the aggregation of the impact of performing a certain discrete activity has a substantial affect on interstate commerce, then an individual's performance of the activity may be regulated by Congress, even if the individual's acts are local in nature."8
The Supreme Court also made clear over a quarter of a century ago, in Fry v. United States, that "[ejven activity that is purely intrastate in character may be regulated by Congress, where the activity, combined with like conduct by other similarly situated, affects commerce among the States."9
It is difficult to imagine an employment relationship that, when considered in this light, would not "involve commerce." Let's not forget that Congress has exercised broad regulatory power over employment through such statutes as Title VII, the Americans with Disabilities Act, the Age Discrimination in Employment Act, and the Family and Medical Leave Act. The fact that these statutes do not apply to smaller employers reflects a legislative judgment by Congress not to place restrictions on such employers. It does not signify a limitation on Congress's Commerce Clause power.
In view of the broad scope of Congress's power under the Commerce Clause and the fact that the FAA's reach extends to the fullest limit of that power, most (and possibly all) employment relationships are governed by the FAA. Therefore, the Arizona Supreme Court's holding in North Valley Emergency Specialists is interesting, but as a practical matter should not affect the enforceability of the vast majority of arbitration provisions in employment agreements.
1 Ariz. Rev. Scat. § 12-1517.
2 93 P.3d 501 (Ariz. 2004).
3 465 U.S. 1, 10 (1984).
4 617 U.S. 681 (1996).
5 532 U.S. 105 (2001).
6 513 U.S. 265 (1995).
7 539 U.S. 52 (2003).
8 University of Ala. Found. v. Walley, 2001 WL 237309 (M.D. Ala. 2001).
9 421 U.S. 542 (1975).
Bruce Meyerson is a mediator and arbitrator in Phoenix, Arizona, and serves on the commercial and employment panels of the American Arbitration Association. He is a former chair of the American Bar Association Section of Dispute Resolution.…
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Publication information: Article title: IN MY OPINION ... Federal Preemption Limits Arizona Ruling on State Arbitration Law. Contributors: Meyerson, Bruce - Author. Magazine title: Dispute Resolution Journal. Volume: 60. Issue: 1 Publication date: February-April 2005. Page number: 58+. © American Arbitration Association Nov 2008-Jan 2009. Provided by ProQuest LLC. All Rights Reserved.
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